Economic Scene; From Kodak, two images of its competitive position.

By Peter Passell

Published: December 29, 1994

(a) It's a big, bad world out there, one in which the giant American film company is engaged in a grueling duel with Fuji Photo Film for domination of the global market.

(b) The past era of monopoly is long gone, now that half a dozen other multinational corporations have made huge investments in the color film business.

"They can't have it both ways," says Lawrence White, an economist at the Stern School of Business at New York University.

Actually, maybe they can. In the last two years, notes Greg Rushford, publisher of a Washington-based newsletter called The Rushford Report, Kodak's lawyers have positioned themselves on both sides of this argument. What's more, they have won both times around.

To some, this only demonstrates that consistency is the hobgoblin of small minds. But, more to the point, it also reflects the contradictions between America's antitrust and international trade laws -- contradictions that Corporate America is discovering can be exploited at the expense of both foreign competitors and American consumers.

Start with the trade case. Kodak filed dumping charges against Fuji in 1993, contending that Fuji, the world's second-largest producer, was competing unfairly in the American market for photographic chemicals and paper. Kodak's experts, Jerry Hausman of the Massachusetts Institute of Technology and Paul Krugman of Stanford, hypothesized that Fuji was selling billions of dollars' worth of products below cost in the American market to discourage the no-longer-invincible Kodak from investing in the next generation of photo technology. Once Kodak slipped behind, they reasoned, Fuji would be able to reap the rewards of its commanding position by raising prices.

If such arguments sound familiar, go to the head of the class. Kodak repackaged the old case against so-called predatory pricing in the new language of strategic trade theory. And it worked: the International Trade Commission, a quasi-judicial Federal agency, ruled in October 1993 that Fuji was selling photo paper at less than fair value. Before the Commerce Department had a chance to calculate the penalty, Fuji agreed to raise prices.

What was good for Kodak was also good for American consumers -- or so Kodak suggested. According to the Kodak version, Fuji would have been willing to absorb huge losses in the short run to drive Kodak from segments of the film business and then reap monopoly profits.

But even as Kodak was warning that it was in danger of losing this battle of titans, it was explaining separately to Federal District Court Judge Michael Telesca in Rochester that Kodak should be released from two antitrust consent decrees because the world market for film was too competitive to be dominated by one company.

Kodak was hobbled by the courts earlier in the century in response to what its critics thought were attempts to monopolize the market for amateur film. In 1921, Kodak was barred from selling what are now called private-label brands -- the house brands sold in great volume by discount chains like Wal-Mart. And in 1954, it agreed to stop tying sales of unexposed film to film processing, thereby handicapping its capacity to dominate the processing business.

But Kodak argued -- and the judge agreed -- that the consent decrees were obsolete. Thanks to computer-based technology, color film can now be processed by thousands of independent shops. And while film in the bright yellow box may still command a premium price, public acceptance of high quality film from Fuji, Konica, Agfa and 3M virtually guarantees that the market will remain competitive, however aggressively any company tries to dominate it. In lifting the consent decrees, Judge Telesca cited a 1986 Federal court ruling that "predatory pricing schemes are rarely tried, and even more rarely successful."

Judge Telesca may well be right. The globalization of markets, the fickle nature of consumer preferences, the unpredictable path of technological change and the relative ease of raising capital all make predatory pricing a highly problematic strategy. But by the same token, they make Kodak's theory that Fuji was selling cheap today in order to sell dear tomorrow look rather dicey. What, after all, could Fuji hope to gain by losing scads of money if the prospects for successful predation later on were so remote?

The anti-dumping laws, says F. M. Scherer, an economist at the Kennedy School of Government at Harvard, are grounded on ideas that economists no longer take very seriously. But what in other circumstances might merely be cause for chuckles about the tangled webs that lawyers weave, Mr. Scherer views as deeply ironic. "Competition from Fuji," he explained, "is largely responsible for the rising quality and falling price of color photography."

Perhaps the best news for consumers, then, is that it took so long before Kodak discovered that investments in lawyers pay as well as investments in film technology.